IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 99-30156
_____________________
AGRILECTRIC POWER PARTNERS, LTD.,
Plaintiff-Counter Defendant-Appellant,
v.
ENTERGY GULF STATES, INC., ET AL.,
Defendants,
ENTERGY GULF STATES, INC.,
Formerly known as Gulf States Utilities Company,
Defendant-Counter Claimant-Appellee.
_______________________________________________________
Appeal from the United States District Court
for the Western District of Louisiana, Lake Charles Division
_______________________________________________________
April 5, 2000
Before POLITZ and DAVIS, Circuit Judges, and RESTANI1, Judge.
DAVIS, Circuit Judge:
This is an appeal by Agrilectric Power Partners, Ltd. (“Agrilectric”) from an order of the
District Court interpreting and applying a contract between Agrilectric and Entergy Gulf States, Inc.
(“Entergy”), a utility company providing electric power to consumers in Louisiana and Texas. We
agree that the “regulatory-out” price adjustment clause in the contract is enforceable and affirm the
district court’s judgment.
I
Agrilectric is a qualified facility (“QF”) under the Public Utility Regulatory Policies Act
(“PURPA”), the federal statute governing this protected category of power-generating companies.
PURPA requires that utilities purchase power from QFs, but states that they cannot be forced to pay
1
Judge of the U. S. Court of InternationalTrade, sitting by designation.
more for this power than their “avoided costs,” t he utilities’ cost of self-generating the power or
purchasing it from other sources.2
Originally entered into in 1984, the electricity sales contract between Agrilectric and Entergy
was amended in 1987 and 1992. The 1992 contract established a 3.54 cents/Kwh flat-rate for the
entire remaining ten-year contract term, but subjected this rate to a “regulatory-out” price adjustment
clause.3 This “regulatory-out” price adjustment clause limited the contract rate to an amount not
greater than that which Entergy could legally recover from its retail customers and called for a price
renegotiation if Entergy was legally prevented from making such a recovery.
In 1997, the Public Utility Commission of Texas (“PUCT”) and the Federal Energy
Regulatory Commission (“FERC”) issued separate rulings regarding the retail rates Entergy had been
and could continue to charge its retail customers. Holding that the flat-rate Entergy had been paying
for Agrilectric’s power and passing onto its retail customers unreasonably exceeded its “avoided
costs,” PUCT ordered Ent ergy to credit its retail customers for these overpayments. For similar
reasons, FERC ordered that Entergy could not make future recoveries after July of 1997 from its
retail customers of amounts Entergy had been overpaying for Agrilectric’s energy.
In accordance with the contract’s “regulatory-out” price adjustment clause, Entergy contacted
Agrilectric to recover retroactive reimbursements for past wholesale electricity overpayments PUCT
had ordered Entergy to credit its Texas retail customers and renegotiate the contract’s wholesale
electricity rate consistent with FERC’s limitation on future retail utility rates. Agrilectric, however,
2
16 U.S.C. § 824a-3(b) (providing that FERC cannot require rates exceeding “the incremental cost
to the electric utility of alternative electric energy”); 18 CFR § 292.101(6) (defining avoided costs
as “the incremental costs to an electric utility of electric energy or capacity or both which, but for the
purchase from the qualifying facility or qualifying facilities, such utility would generate itself or
purchase from another source”).
3
Contained in section 3.1 of the contract, the “regulatory-out” price adjustment clause reads as
follows: “Payment to Seller. The payments by [Entergy] to [Agrilectric] under this Agreement shall
not be greater than the amount [Entergy], during any recovery period, fuel adjustment or
reconciliation hearing, or any other point in time or for any period in time during the term of this
Agreement, shall be allowed to recover as an energy, fuel, or other cost, in all regulatory jurisdictions.
In such event, the parties shall mutually agree to the adjustment of payments to [Agrilectric].”
2
refused to comply with either request. Consequently, in August of 1997, Entergy unilaterally reduced
the price it was paying for Agrilectric’s power to bring the wholesale electricity rate in line with the
amount it was able to recover from its retail customers as per their “regulatory-out” price adjustment
clause.
Agrilectric filed suit for declaratory relief and specific performance in the district court.
Specifically, Agrilectic requested that the contract be enforced without the “regulatory-out” price
adjustment clause, that its rights and obligations be declared under its interpretation of the contract,
and that Entergy be ordered to abide by the contract’s 3.54 cents/Kwh flat-rate pricing provision.
In response, Entergy filed a counterclaim, alleging that Agrilectic breached the contract by refusing
to adjust the price in accordance with the “regulatory-out” price adjustment clause as triggered by
the PUCT and FERC rulings. Entergy sought specific performance of this clause and over $2 million
in damages, the amount it claims it suffered as a result of the breach.
The district court ruled that Agrilectric had breached the contract by refusing to adjust the
price pursuant to the “regulatory-out” price adjustment clause. In a Supplemental Memorandum
Ruling and Judgment, the court dismissed Agrilectric’s claims and awarded damages to Entergy in
the amount of $1.9 million plus interest.
II.
In this appeal, Agrilectric argues that the electricity sales contract’s “regulatory-out” price
adjustment clause is unenforceable and federally preempted by PURPA and its associated regulations.
The gravamen of its argument is that QFs and utilities are restricted from including “regulatory-out”
price adjustment clauses in their wholesale power sales contracts because such price adjustment
provisions give state regulatory agencies the power to encroach on the federally preempted ambit of
wholesale power rates between such parties. This argument is directly contradicted by PURPA, the
regulations promulgated under its authority, and cases applying these laws to wholesale electricity
contracts with similar “regulatory-out” price adjustment clauses.
While PURPA establishes that regulatory agencies may not alter wholesale price terms in
3
contracts between QFs and utilities, see Freehold Cogeneration Assoc., L.P. v. Board of Regulatory
Commissioners of New Jersey, 44 F.3d 1178 (3d. Cir. 1995), the PUCT and FERC rulings in this
case only address Entergy’s retail electricity rates, an area in which their authority has not been
federally preempted, see Hopewell Cogeneration Assoc. v. State Corp. Comm., 453 S.E.2d 277 (Va.
1995). Neither the PUCT nor FERC ruling purports to regulate the wholesale electricity rate paid
by Entergy to Agrilectric. Instead, both directives simply declined to permit Entergy to pass through
charges to its retail customers that these agencies deemed excessive. The only effect these orders
had on Agrilectric’s wholesale contract with Entergy was a derivative one, which Agrilectric felt
through the “regulatory-out” price adjustment clause that Agrilectric freely agreed to in its 1992
contract with Entergy. PURPA and its regulations explicitly give QFs and utilities the freedom to
voluntarily contract around these restrictions and agree to whatever other rates, terms, and conditions
they prefer4, and, as a result, in no way prohibit the “regulatory-out” price adjustment clause in this
contract.
While Agrilectric asserts that similar “regulatory-out” price adjustment clauses have been
5
rejected by the court s, t he cases it presents for this proposition fail to support its argument. In
4
18 C.F.R. § 292.301(b) (“Nothing in this subpart: (1) Limits the authority of any electric utility
or any [QF] to agree to a rate for any purchase, or terms or conditions relating to any purchase,
which differ from the rate or terms or conditions which would otherwise be required by this subpart;
or (2) Affects the validity of any contract entered into between a [QF] and an electric utility for any
purchase.”) (emphasis added).
5
Unlike the case at bar, Agrilectric cites cases involving state regulatory actions aimed at both
utilities and QFs to directly alter the terms of agreed upon wholesale electricity contracts. Two cases
Agrilectric repeatedly cites in its Brief are illustrative of its unfounded reliance on these rulings. In
Freehold Cogeneration Associates L.P. v. New Jersey Board of Regulatory Comm’r, 44 F.3d 1178
(3d Cir. 1995), the Third Circuit Court of Appeals overturned the Board of Regulatory
Commissioners of the State of New Jersey’s attempt to force a QF and a utility to renegotiate power
rates, negotiate a contract buy -out, or be subject to a possible Board order enforcing lower rates.
In Freehold, the court simply stated that a “regulatory-out” price adjustment clause did not confer
such expansive jurisdiction on state regulators to pursue this type of direct and invasive regulatory
control over wholesale electricity contracts. In stark contrast, neither the PUCT nor FERC ruling
in the present case is directed at altering the Agrilectric/Entergy contract price and neither
administrative body claims to be exercising expanded jurisdiction by virtue of the parties’ “regulatory-
out” price adjustment clause. Instead, this voluntarily included provision merely responds to state
retail electricity regulation and utilizes these independent regulatory decisions to alter a price-term,
which both parties deliberately made variable. Likewise, in Smith Cogeneration Management, Inc.
4
particular, during oral argument, Agrilectric’s counsel brought the recent case North American
Natural Resources v. Michigan Public Service Commission, 73 F.Supp.2d 804 (W.D. Mich. 1999),
to the panel’s attention. While the district court in this case did overturn a state’s retail price
regulation altering wholesale electricity rates via a “regulatory-out” price adjustment clause similar
to the one at issue in this appeal, the ruling was based on a finding that the state order threatened to
deprive the QF of a rate equivalent to the utility’s full “avoided costs,” which PURPA entitles QFs
to receive. Id. Thus, the state order’s infirmity lay in impo
sing a ret ail rate that reduced the
wholesale price below a statutorily guaranteed floor. Not only does North American not overturn
the “regulatory-out” price adjustment clause in the case, it necessarily accepts this provision’s validity
in order to reach its conclusion and refers to the clause as an enforceable condition.6 Consequently,
this case supports the enforceability of “regulatory-out” price adjustment clauses like the one at issue
in this case.
III
For the above reasons, we agree with the district court’s well reasoned opinion that the
“regulatory out” price adjustment clause in the contract between Agrilectric and Entergy is
enforceable.7 Therefore, the judgment of the district court is affirmed.
v. Oklaho ma Corp. Comm’r and Pub. Serv. Co. of Oklahoma, 863 P.2d 1227 (Okla. 1993), the
Supreme Court of Oklahoma invalidated a requirement by state regulators to
require “regulat ory-out” price adjustment clauses in all such wholesale power contracts.
Significantly, the court found the state’s requirement of these clauses conflicted with the parties’
federally guaranteed right to freely negotiate long-term fixed-rate wholesale power contracts. Thus,
the court objected to the state’s imposition of these “regulatory-out” price adjustment clauses, rather
than the voluntary inclusion of these provisions as in the Entergy/Agrilectric contract.
6
Id. at 809 (stating that the QFs “have shown that if the utilities are precluded from recovering
their avoided costs, the utilities have the right to reduce their payments to plaintiffs pursuant to the
‘regulatory out’ provisions” in the wholesale electricity contracts and disallow the QFs from receiving
a statutorily guaranteed rate).
7
Agrilectric raises a number of issues on appeal that it failed to directly raise in the district court.
Chief among these are their arguments that the filed rate doctrine preempts Texas from disallowing
the full pass-through in retail rates of the approved and implemented Agrilectric wholesale power
sales rate and that the wholesale power contract was an unenforceable contract of adhesion. We do
not consider issues raised for the first time on appeal. See e.g., Self v. Blackburn, 751 F.2d 789, 793
(5th Cir. 1985).
5
AFFIRM.
6